UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 001-14910
GOUVERNEUR BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
United States 04-3429966
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 Church Street, Gouverneur, New York 13642
(Address of principal executive offices)
Issuer's telephone number (315) 287-2600
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Outstanding at
Class February 6, 2006
----- ----------------
Common Stock, par value $ .01 2,287,684
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
GOUVERNEUR BANCORP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition at December 31,
2005 and at September 30, 2005 3
Consolidated Statements of Income for the three months ended
December 31, 2005 and 2004 4
Consolidated Statements of Changes in Shareholders' Equity for
three months ended December 31, 2005 and 2004 5
Consolidated Statements of Cash Flows for the three months
ended December 31, 2005 and 2004 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Controls and Procedures 20
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 21
Item 6. Exhibits 21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data) (Unaudited)
December 31, September 30
2005 2005
------------ ------------
Assets:
Cash and due from banks $ 1,798 $ 2,210
Interest-bearing deposits in bank 266 456
------------ ------------
Total cash and cash equivalents 2,064 2,666
Securities available-for-sale 10,546 10,992
Securities held-to-maturity (fair value of $104 at December 31,
2005 and $110 at September 30, 2005) 104 109
Loan held for sale 2,198 3,436
Loans, net of deferred fees 100,561 97,609
Less allowance for loan losses (873) (869)
------------ ------------
Loans, net 99,688 96,740
Investment in Federal Home Loan Bank stock, at cost 1,805 1,838
Investment in life insurance 3,748 3,717
Premises and equipment, net 1,562 1,547
Accrued interest receivable and other assets 1,232 1,181
------------ ------------
Total assets $ 122,947 $ 122,226
============ ============
Liabilities:
Deposits: Non interest-bearing demand $ 2,021 $ 2,043
NOW and money market 11,853 11,956
Savings 19,564 19,101
Time 30,927 30,864
------------ ------------
Total deposits 64,365 63,964
------------ ------------
Advances from Federal Home Loan Bank 36,500 36,750
Accrued interest payable and other liabilities 3,050 2,837
------------ ------------
Total liabilities 103,915 103,551
------------ ------------
Shareholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value, 9,000,000 shares authorized;
2,384,040 shares issued 24 24
Additional paid-in capital 4,760 4,739
Retained earnings 14,687 14,392
Treasury stock, at cost, December, 96,356 shares; September,
98,606 shares (488) (499)
Accumulated other comprehensive income 287 272
Unearned common stock held by MRP (63) (67)
Unallocated common stock held by ESOP (175) (186)
------------ ------------
Total shareholders' equity 19,032 18,675
------------ ------------
Total liabilities and shareholders' equity $ 122,947 $ 122,226
============ ============
See accompanying notes to the consolidated financial statements.
3
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three Months Ended
December 31,
----------------------------
2005 2004
------------ ------------
Interest income:
- ----------------
Loans $ 1,681 $ 1,368
Securities-taxable 126 113
-non-taxable 12 12
Other short-term investments 4 7
------------ ------------
Total interest income 1,823 1,500
------------ ------------
Interest expense:
- -----------------
Deposits 343 264
Borrowings - short-term 197 49
Borrowings - long-term 187 170
------------ ------------
Total interest expense 727 483
------------ ------------
Net interest income 1,096 1,017
Provision for loan losses 25 40
------------ ------------
Net interest income after provision for loan losses 1,071 977
------------ ------------
Non-interest income
- -------------------
Service charges 64 48
Realized gains on sales of loans 7 --
Earnings on investment in life insurance 31 39
Other 43 36
------------ ------------
Total non-interest income 145 123
------------ ------------
Non-interest expenses
- ---------------------
Salaries and employee benefits 408 422
Directors fees 43 34
Occupancy and Equipment 105 92
Data processing 30 35
Postage and supplies 30 26
Professional fees 61 61
Foreclosed assets, net (32) (12)
Other 114 103
------------ ------------
Total non-interest expenses 759 761
------------ ------------
Income before income tax expense 457 339
Income tax expense 162 120
------------ ------------
Net income $ 295 $ 219
============ ============
Earnings per common share - basic $ 0.13 $ 0.10
Earnings per common share - diluted $ 0.13 $ 0.10
See accompanying notes to the consolidated financial statements.
4
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2005
(In thousands, except share data) (Unaudited)
Accumulated Unearned Unallocated
Additional Other common common
Common Paid In Retained Treasury Comprehensive stock held stock held
Stock Capital Earnings Stock Income By MRP by ESOP Total
----------- ------------ ----------- ----------- ------------ ------------ ------------ -----------
Balance at
September 30, 2005 $ 24 $ 4,739 $ 14,392 $ (499) $ 272 $ (67) $ (186) $ 18,675
-----------
Comprehensive Income:
Net Income 295 295
Change in net
unrealized gain
on Securities
available for sale,
net of taxes 15 15
-----------
Total comprehensive
income 310
-----------
Allocation of ESOP
shares
(2,482 shares) 15 11 26
Amortization of MRP 6 4 10
Exercise of stock
options
(2,250 shares) 11 11
----------- ------------ ----------- ----------- ------------ ------------ ------------ -----------
Balance at
December 31, 2005 $ 24 $ 4,760 $ 14,687 $ (488) $ 287 $ (63) $ (175) $ 19,032
=========== ============ =========== =========== ============ ============ ============ ===========
5
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2004
(In thousands, except share data) (Unaudited)
Accumulated Unearned Unallocated
Additional Other common common
Common Paid In Retained Treasury Comprehensive stock held stock held
Stock Capital Earnings Stock Income By MRP by ESOP Total
----------- ------------ ----------- ----------- ------------ ------------ ------------ -----------
Balance at
September 30, 2004 $ 24 $ 4,642 $ 13,632 $ (511) $ 451 $ (57) $ (231) $ 17,950
-----------
Comprehensive Income:
Net Income 219 219
Change in net
unrealized gain
on Securities
available for sale,
net of taxes 57 57
-----------
Total comprehensive
income 276
-----------
Allocation of ESOP
shares
(2,137 shares) 22 10 32
Amortization of MRP 2 2
Exercise of stock
options
(1,125 shares) 2 6 8
----------- ------------ ----------- ----------- ------------ ------------ ------------ -----------
Balance at
December 31, 2004 $ 24 $ 4,666 $ 13,851 $ (505) $ 508 $ (55) $ (221) $ 18,268
=========== ============ =========== =========== ============ ============ ============ ===========
6
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Three Months Ended
December 31,
------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net Income $ 295 $ 219
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 25 40
Depreciation 28 31
Net amortization of securities premiums and discounts 4 8
Net realized gains on sales of participation interests in loans (7) --
Earnings on bank owned life insurance (31) (39)
Allocated and earned shares of ESOP and MRP 36 34
Net realized gain on sales of foreclosed real estate (32) (12)
Increase in accrued interest receivable and other assets (8) (45)
Increase in accrued interest payable and other liabilities 203 620
---------- ----------
Net cash provided by operating activities 513 856
---------- ----------
Cash flows from investing activities:
Net increase in loans (2,974) (6,536)
Proceeds from maturities and principal reductions of securities AFS 473 1,051
Purchases of securities AFS (6) (6)
Proceeds from maturities and principal reductions of securities HTM 5 52
Proceeds from sales of foreclosed assets 3 97
Additions to premises and equipment (43) (164)
Proceeds from sales of participation interests in loans 1,232 --
(Purchases) redemptions of Federal Home Loan Bank stock 33 (200)
---------- ----------
Net cash used in investing activities (1,277) (5,706)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 401 775
Proceeds (repayments) from FHLB advances (250) 4,000
Exercise of stock options 11 8
---------- ----------
Net cash provided by financing activities 162 4,783
---------- ----------
Net decrease in cash and cash equivalents (602) (67)
Cash and cash equivalents at beginning of period 2,666 2,715
---------- ----------
Cash and cash equivalents at end of period $ 2,064 $ 2,648
========== ==========
Non-cash investing activities:
Additions to foreclosed assets $ 14 $ 41
Cash paid during the period for:
Interest 729 474
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements include
the accounts of Gouverneur Bancorp, Inc. (the "Company") and Gouverneur
Savings and Loan Association (the "Bank"), the wholly owned and only
subsidiary of the Company, as of December 31, 2005 and September 30,
2005 and for the three month periods ended December 31, 2005 and 2004.
All material intercompany accounts and transactions have been
eliminated in this consolidation. These statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not
include information or footnotes necessary for a complete presentation
of financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles in the United
States of America.
In the opinion of management, all adjustments, consisting of only
normal recurring adjustments or accruals, which are necessary for a
fair presentation of the consolidated financial statements have been
made at and for the three month periods ended December 31, 2005 and
2004. The results of operations for the three month period ended
December 31, 2005 are not necessarily indicative of the results which
may be expected for an entire fiscal year or other interim periods.
The data in the consolidated statements of condition for September 30,
2005 was derived from the Company's annual report on Form 10-KSB. That
data, along with the interim financial information presented in the
consolidated statements of financial condition, income, shareholders'
equity and cash flows should be read in conjunction with the 2005
consolidated financial statements, including the notes thereto included
in the Company's 2005 Annual Report on Form 10-KSB.
2. Earnings Per Common Share
-------------------------
Basic earnings per share is calculated by dividing net income available
to common shareholders by the weighted average number of shares
outstanding during the period. Unallocated shares held by the Company's
Employee Stock Ownership Plan ("ESOP") are not included in the weighted
average number of shares outstanding. Unearned shares held by the
Company's Management Recognition Plan ("MRP") are not included in the
weighted average number of shares outstanding. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued, (for
example, through the exercise of common stock options), as well as any
adjustment to income that would result from the assumed issuance.
8
Basic and diluted earnings per common share for the three-month periods
ended December 31, 2005 and 2004 were computed as follows:
(In thousands, except per share data)
Three Months Ended
December 31,
-----------------------
Basic earnings per common share: 2005 2004
---------- ----------
Net income $ 295 $ 219
Weighted average common shares outstanding 2,237 2,224
Basic earnings per common share $ 0.13 $ 0.10
Diluted earnings per common share:
Net income $ 295 $ 219
Weighted average common shares outstanding 2,237 2,224
Additional potentially dilutive securities
(equivalent in common stock)
Common Stock options 28 36
---------- ----------
Diluted weighted average common shares outstanding 2,265 2,260
Diluted earnings per common share $ 0.13 $ 0.10
3. Comprehensive Income
--------------------
Comprehensive income, presented in the consolidated statements of
shareholders' equity, consists of net income and the net change for the
period in after-tax unrealized gains or losses on securities available
for sale. Accumulated other comprehensive income in the consolidated
statements of financial condition represents the net unrealized gains
or losses on securities available for sale as of the reporting dates,
net of related tax effect.
A summary of the unrealized gains (losses) and reclassification
adjustments of securities available for sale and the related tax
effects for the three month periods ended December 31, 2005 and 2004 is
as follows:
Three Months Ended
December 31,
------------------------
2005 2004
---------- ----------
(In thousands, except per share data)
Unrealized holding gains arising
during the period $ 25 $ 94
Reclassification adjustment for losses realized in
net income during period -- --
---------- ----------
25 94
Tax effect (10) (37)
---------- ----------
Other comprehensive income, net of tax $ 15 $ 57
========== ==========
9
4. Stock Option and Management Recognition Plans
---------------------------------------------
The Company has a Stock Option Plan ("SOP") and the MRP for directors,
officers and key employees. The Company accounts for stock options
granted under the SOP and MRP in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. The Company provides
pro forma net income and pro forma earnings per share disclosures for
employee stock options grants as if the fair-value-based method defined
in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", had been applied. The fair
value of the shares awarded, under the MRP, measured as of the grant
date, is recognized as unearned compensation (a component of
shareholders' equity) and amortized to compensation expense over the
vesting period.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation:
Three Months Ended
December 31,
------------------------
2005 2004
---------- ----------
(In thousands, except per share data)
Net income, as reported $ 295 $ 219
Total stock-based compensation expense determined
under fair value method for all awards, net of taxes (8) (2)
Reclassification adjustment for gains realized in
Amounts included in determination of net income,
net of taxes 6 1
---------- ----------
Pro forma net income $ 293 $ 218
========== ==========
Earnings per share:
Basic - as reported $ 0.13 $ 0.10
Basic - pro forma 0.13 0.10
Diluted - as reported $ 0.13 $ 0.10
Diluted - pro forma 0.13 0.10
5. Commitments and Contingencies
-----------------------------
Outstanding letters of credit written are conditional commitments
issued by the Company to guarantee the performance by a customer to a
third party. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
conditional obligations as it does for on-balance sheet instruments.
The Company had three standby letters of credit totaling $53,000 as of
December 31, 2005.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending other loan commitments. The
Company requires collateral and personal guarantees supporting these
letters of credit as deemed necessary. Management believes that the
proceeds obtained through a liquidation of such collateral in the event
of a default, and the enforcement of personal guarantees would be
sufficient to cover the maximum potential amount of future payments
required under the corresponding guarantees.
10
6. Dividend Restrictions
---------------------
Cambray Mutual Holding Company ("Cambray MHC"), the Company's parent
mutual holding company, held 1,311,222 shares, or 57.3%, of the
Company's issued and outstanding common stock, and shareholders other
than Cambray MHC held 976,462 shares or 42.7% of such stock at December
31, 2005. Cambray MHC has filed a notice with the Office of Thrift
Supervision ("OTS") to waive its right to receive cash dividends during
the 2006 calendar year.
Cambray MHC waived receipt of several past dividends, paid by the
Company. The dividends waived are considered a restriction on the
retained earnings of the Company. As of December 31, 2005 and September
30, 2005, the aggregate retained earnings restricted for cash dividends
waived was $1,114,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
When we use words or phrases like "will probably result," "we expect,"
"will continue," "we anticipate," "estimate," "project," "should cause" or
similar expressions in this Form 10-QSB or in any press releases, public
announcements, filings with the Securities and Exchange Commission or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we will provide in the future on a regular basis, such as analysis
of the adequacy of our allowance for loan losses or an analysis of interest rate
sensitivity of our assets and liabilities, is always based on predictions of the
future. From time to time, we may also publish other forward-looking statements
regarding anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what was anticipated in our forward-looking statements. Some of the risks
and uncertainties that may affect our operations, performance, development and
results, the interest rate sensitivity of our assets and liabilities, and the
adequacy of our allowance for loan losses, include:
o Local, regional, national or global economic conditions which could cause
an increase in loan delinquencies, a decrease in property values, or a
change in the housing turnover rate;
o Changes in market interest rates or changes in the speed at which market
interest rates change;
o Changes in laws and regulations affecting us, including changes in
accounting standards;
o Changes in competition; and
o Changes in consumer preferences.
Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.
11
General
The Company conducts no income generating activities other than holding the
stock of the Bank and a loan to the ESOP used to purchase shares of Company
common stock for the participants. Consequently, the net income of the Company
is derived primarily from its investment in the Bank. The Bank's net income
depends, to a large extent, on its net interest income, which is the difference
between interest earned on its interest earning assets, such as loans and
investments, and the cost of funds, consisting of interest paid on interest
bearing liabilities, such as deposits and borrowings. The Bank's net income is
also affected by the provision for loan losses, as well as by the amount of
other income, including income from fees and service charges, net gains and
losses on sales of investments and operating expenses such as salaries and
employee benefits costs, net expenses on foreclosed real estate and various
categories of operational expenses. External factors, such as general economic
and competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities, can have a substantial effect on
profitability.
The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services. The Bank attracts deposits
from the general public and uses those deposits together with funds borrowed
from the Federal Home Loan Bank of New York ("FHLB"), to make loans and other
investments. Most of the loans are one to four family residential mortgages made
to residents in the Bank's primary market area, which includes southern St.
Lawrence and northern Jefferson and Lewis counties in New York State. The Bank's
deposit accounts are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC"), and the Bank is subject
to regulation by the FDIC and the OTS.
Critical Accounting Policies
Note 2 to the consolidated financial statements of the Company (included in item
7 of the Annual Report on Form 10-KSB of the Company for the year ended
September 30, 2005) lists significant accounting policies used in the
development and presentation of its financial statements. This discussion and
analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the Company's results of operations. The following accounting policy is the one
identified by management to be critical to the results of operations:
Allowance for Loan Losses. The allowance for loan losses is the estimated
amount considered adequate to cover credit losses inherent in the outstanding
loan portfolio at the balance sheet date. The allowance is established through
the provision of loan losses charged against income. In determining the
allowance for loan losses, management makes significant estimates and,
accordingly, has identified this policy as probably the most critical for the
Company.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in the Company's
loan portfolio. The allowance for loan losses is maintained at an amount
management considers adequate to cover loan losses deemed probable by our
estimates. The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience,
the Company's underwriting policies and other relevant factors. The Company
evaluates, on a monthly basis, all loans identified as problem loans, including
all non-accrual loans and other loans where management has reason to doubt
collection in full in accordance with original payment terms. The Company
considers whether the allowance should be adjusted to protect against risks
associated with such loans. In addition, the Company applies a percentage, for
each category of performing loans not designated as problem loans, to determine
an additional component of the allowance to protect against unascertainable
risks inherent in any portfolio of performing loans.
12
The analysis of the adequacy of the allowance is reported to and reviewed
by the Board of Directors quarterly. Management believes it uses a reasonable
and prudent methodology to project losses in the loan portfolio, and hence
assess the adequacy of the allowance for loan losses. However, any such
assessment is only an informed estimate and future adjustments may be necessary
if economic conditions or the Company's actual experience differ substantially
from the assumptions upon which the evaluation of the allowance was based.
Furthermore, state and federal regulators, in reviewing the Company's loan
portfolio as part of a future regulatory examination, may request the Company to
increase its allowance for loan losses, thereby negatively affecting the
Company's financial condition and earnings at that time. Moreover, future
additions to the allowance may be necessary based on changes in economic and
real estate market conditions, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
13
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated, the average
interest-earning assets and average interest-bearing liabilities by principal
categories, the interest income or expense for each category, and the resultant
average yields earned or rates paid. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-interest-bearing checking
accounts are included in the tables as a component of non-interest-bearing
liabilities
For the three months Ended December 31,
----------------------------------------------------------------------------------------
2005 2004
------------------------------------------ ------------------------------------------
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
------------ ------------ ------------ ------------ ------------ ------------
Loans, net (1) $ 101,148 $ 1,681 6.59% $ 83,596 $ 1,368 6.49%
Securities (2) 12,289 138 4.46% 14,192 125 3.49%
Other short-term investments 413 4 3.84% 1,578 7 1.76%
------------ ------------ ------------ ------------
Total interest-earning assets 113,850 1,823 6.35% 99,366 1,500 5.99%
------------ ------------
Non-interest-earning assets 8,507 8,590
------------ ------------
Total assets $ 122,357 $ 107,956
============ ============
Savings and club accounts (3) $ 19,770 $ 50 1.00% $ 20,105 $ 52 1.03%
Time certificates 30,900 259 3.33% 29,393 190 2.56%
NOW and money market accounts 11,981 34 1.13% 11,732 22 0.74%
Borrowings 36,676 384 4.15% 25,326 219 3.43%
------------ ------------ ------------ ------------
Total interest-bearing liabilities 99,327 727 2.90% 86,556 483 2.21%
------------ ------------
Non-interest-bearing liabilities 4,189 3,282
------------ ------------
Total liabilities 103,516 89,838
Shareholders' equity 18,841 18,118
------------ ------------
Total liabilities and
shareholders' equity $ 122,357 $ 107,956
============ ============
Net interest income/spread (4) $ 1,096 3.45% $ 1,017 3.78%
============ ============ ============ ============
Net earning assets/net interest
margin (5) $ 14,523 3.82% $ 12,810 4.06%
============ ============ ============ ============
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.15x 1.15x
============ ============
Notes appear on following page
14
(1) Shown net of the allowance for loan losses. Average loan balances include
non-accrual loans and loan held for sale. Interest is recognized on
non-accrual loans only as and when received.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available for sale included as a component of
non-earning assets. Securities include FHLB stock.
(3) Include advance payments by borrowers for taxes and insurance (mortgage
escrow deposits).
(4) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(6) Yields are not computed on a tax equivalent basis.
Rate Volume Analysis of Net Interest Income
One method of analyzing net interest income is to consider how
changes in average balances and average rates from one period to the next affect
net interest income. The following table shows changes in the dollar amount of
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It shows the amount of the change in
interest income or expense caused by either changes in outstanding balances
(volume) or changes in interest rates. The effect of a change in volume is
measured by multiplying the average rate during the first period by the volume
change between the two periods. The effect of a change in interest rates is
calculated by multiplying the change in rate between the two periods by the
average volume during the first period. Changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
For the three months ended December 31,
---------------------------------------
2005 vs. 2004
-------------
Increase (Decrease) Due To:
--------------------------------------
Volume Rate Total
---------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans $ 292 $ 21 $ 313
Securities (18) 31 13
Other short-term investments (8) 5 (3)
---------- ---------- ----------
Total interest-earning assets 266 57 323
---------- ---------- ----------
Interest-bearing liabilities:
Savings and club accounts (1) (1) (2)
Time certificates 10 59 69
NOW and money market accounts -- 12 12
Borrowings 112 53 165
---------- ---------- ----------
Total interest-bearing liabilities 121 123 244
---------- ---------- ----------
Net change in net interest income $ 145 $ (66) $ 79
========== ========== ==========
15
Comparison of Financial Condition at December 31, 2005 and September 30, 2005.
During the three months from September 30, 2005 through December 31, 2005,
total assets increased $0.7 million, or 0.6%, from $122.2 million to $122.9
million. Net loans increased by $2.9 million, or 3.0%, from $96.8 million to
$99.7 million. This increase resulted mainly from growth of $2.7 million in
residential real estate loans. One commercial real estate loan in the amount of
$2.4 million carries a 90% guarantee, or $2.2 million, from the United States
Department of Agriculture, ("USDA"). The guaranteed portion is classified as
held for sale on the consolidated statements of financial condition at December
31, 2005, and will be sold in the secondary market when we receive final USDA
approval.
Borrowed funds from FHLB, consisting of advances and securities repurchase
obligations, were $36,500,000 on December 31, 2005 and $36,750,000 on September
30, 2005. The decrease of $250,000 in borrowed funds resulted because other
funds were available to fund loan growth, including $1,232,000 in proceeds from
the sale of loans held for sale, a $401,000 increase in deposits, a $451,000
decrease in investments and a $602,000 decrease in cash and cash equivalents.
Deposits increased $401,000, or 0.6%, during the quarter from $64.0
million to $64.4 million.
Our shareholders' equity rose by $357,000 during the first quarter of the
fiscal year as net income of $295,000, combined with increases of $36,000 from
the allocation of ESOP and MRP shares, $15,000 in the fair value (net of taxes)
of our available-for-sale securities portfolio and the issuance of $11,000 in
treasury stock. Treasury stock was used to supply the 2,250 shares needed when
two directors exercised some of their vested stock options.
Non-performing assets increased from $399,000 on September 30, 2005 to
$633,000 at December 31, 2005, while the ratio of non-performing assets to total
assets increased from 0.32% to 0.51% over the same period. Non-performing loans
increased from 0.39% of total loans at September 30, 2005 to 0.62% at December
31, 2005. A summary of the Company's non-performing assets and related ratios
follows:
Non-performing assets December 31, September 30,
2005 2005
------------ ------------
Non-accrual loans
-----------------
Residential mortgages
and home equity loans $ 303 $ 115
Commercial mortgages 272 275
Consumer other 41 3
Commercial other -- --
------------ ------------
Total non-accrual loans 616 393
Restructured commercial mortgage -- --
Restructured commercial other -- --
------------ ------------
Total non-performing loans 616 393
Foreclosed real estate -- --
Other repossessed assets 17 6
------------ ------------
Total non-performing assets $ 633 $ 399
============ ============
Non-performing loans as a
percent of total loans 0.62% 0.39%
Non-performing assets as a
percent of total assets 0.51% 0.32%
16
Seven of nine non-accrual residential mortgages are currently in
foreclosure proceedings, with three of the foreclosed loans in bankruptcy
proceedings.
Two loans total the $272,000 non-accrual balance for commercial mortgages,
both of which are in foreclosure proceedings, with one in the amount of $17,000
also in bankruptcy proceedings.
The Company had no loans more than 90 days delinquent and accruing at
December 31, 2005 or September 30, 2005.
Management feels that the increase in non-performing residential mortgages
may be in part related to higher energy costs precipitated by the more than
doubling of oil prices on the world market. These increases for both heating
fuel and gasoline are impacting all residents and especially those on limited
incomes. We expect there may be an upward trend in delinquencies related to
energy prices. Management believes that these non-performing loans are
adequately secured by collateral. Further, management is not aware of any other
factors common to these loans, which caused their non-performance. Accordingly,
while we will continue to monitor asset quality, management has determined that
the allowance for loan losses is appropriate at this time.
Comparison of Results of Operations for the Three Months Ended December 31, 2005
and 2004.
General. Our net income for the three months ended December 31, 2005 was
$295,000, an increase of $76,000, or 34.7%, over our net income of $219,000 for
the same period last year. The increase in net income was produced by the
combination of the following factors:
1. our net interest income increased by $79,000, as interest income
increased $323,000 and interest expense increased by $244,000,
2. non-interest income grew by $22,000 over last year's period
principally due to an increase in service charge income of $16,000 and
a $7,000 gain on sale of loans,
3. the provision for loan losses decreased by $15,000 for the first
quarter of this fiscal year versus last fiscal year,
4. non-interest expenses decreased $2,000 from last year to this year
principally due to decreases in salaries and employee benefits expense
and expense on foreclosed assets of $14,000 and $20,000, respectively,
and
5. an increase of $42,000 in income taxes.
Basic and diluted earnings per share were $0.13 for this year's quarter
versus $0.10 for both measures in last year's quarter.
Interest Income. A summary of the information shown previously in the
Average Balances, Interest Rates and Yields table and in the Rate Volume
Analysis of Net interest Income table follows:
1. Results for the three months ended December 31, 2005 show that
interest income increased by $323,000, or 21.5%, from $1,500,000 for
the three months ended December 31, 2004 to $1,823,000. Interest
income increased $266,000 due to an increase in the average balance of
interest-earning assets, from $99.4 million to $113.9 million, while
interest income increased $57,000 due to an increase in the average
rate earned on interest-earning assets from 5.99% to 6.35%.
2. Interest income on loans increased $313,000, or 22.9%, for the first
three months of fiscal 2006, as compared to the first three months of
fiscal 2005. Growth of the average balance of loans accounted for an
increase in interest income of $292,000, while an increase in the
average rate on loans increased interest income $21,000.
17
3. Interest income on securities and other short-term investments
increased by $10,000 from $132,000 at December 31, 2004 to $142,000 at
December 31, 2005. A decrease in the average balance of securities and
other short-term investments decreased interest income by $26,000,
while an increase in the average interest rate on securities and other
short-term investments increased interest income by $36,000.
Interest Expense. A summary of the information shown previously in the
Average Balances, Interest Rates and Yields table and in the Rate Volume
Analysis of Net interest Income table follows:
1. Interest expense increased by $244,000, or 50.5%, from $483,000 for
the first quarter of fiscal 2005 to $727,000 for the first quarter of
fiscal 2006. Interest expense increased $121,000 due to an increase in
the average balance of interest-bearing liabilities, mainly borrowings
from the FHLB, from $86.6 million last year to $99.3 million this year
and $123,000 due to an increase in the in the average rate paid on
interest-bearing liabilities from 2.21% to 2.90% over the same period.
2. Over the same period, increases in the average balances of time
certificates of $1.5 million, from $29.4 million to $30.9 million, and
borrowings of $11.4 million, from $25.3 million to $36.7 million,
resulted in increases in interest expense of $10,000 and $112,000,
respectively. Increases in the average rate paid on time certificates,
NOW and money market accounts, and borrowings increased interest
expense $59,000, $12,000 and $53,000, respectively.
Net Interest Income. Net interest income increased by $79,000, or 7.8%, in
the first three months of fiscal 2006 versus the first three months of fiscal
2005. The increase in net interest income represents the difference between the
$323,000 increase in interest income and the $244,000 increase in interest
expense. The Average Balances, Interest Rates and Yields table shows that spread
is decreasing as the yield curve continues to flatten in response to the efforts
of the Federal Reserve's interest tightening measures to combat inflation. The
average interest rate on interest-earning assets increased by 36 basis points,
while the average interest rate on interest-bearing liabilities increased by 69
basis points, thereby reducing spread by 33 basis points.
The Rate Volume Analysis of Net Interest Income table shows that the
reduction of interest spread by 0.33%, decreased net interest income by $66,000.
We were able to overcome this spread compression by increasing our loan balance,
as discussed above. The current flat yield curve interest rate environment will
work to further erode our interest spread as the growth of interest expense
outpaces the growth of interest income due to interest rate changes. At this
time, we cannot predict whether we will be able to grow the loan portfolio
sufficiently to compensate for the effects of this interest rate environment.
Average shareholders' equity represented 16.5% of average interest-earning
assets for the quarter ended December 31, 2005, while it represented 18.2% of
average interest-earning assets for the same quarter last year. Our ratio of
average interest-earning assets to average interest-bearing liabilities was 1.15
times in both fiscal 2005 and fiscal 2006.
Provision for Loan Losses. The provision for loan losses results from our
analysis of the adequacy of the allowance for loan losses. If we believe that
the allowance should be higher, then we increase it, with a charge to provision
for loan losses, which is an expense on our income statement. In determining the
appropriate provision for loan losses, management considers the level of and
trend in non-performing loans, the level of and trend in net loan charge-offs,
the dollar amount and mix of the loan portfolio, as well as general economic
conditions and real estate trends in the Company's market area, which can impact
the inherent risk of loss in the Company's portfolio. Furthermore, the OTS may
disagree with our judgments regarding the risks in our loan portfolio and could
require us to increase the allowance in the future.
18
For the three months ended December 31, 2005, we provided $25,000 for loan
losses, compared to $40,000 in the same quarter last year. At December 31, 2005,
the ratio of our loan allowance to total loans was 0.86% as compared to 0.90% on
December 31, 2004. On September 30, 2005 the allowance was $869,000, or 0.87% of
total loans, and we determined at the end of the quarter that the appropriate
level for the allowance was $873,000. We had charge-offs during the quarter of
$33,000 and recoveries of $12,000, so a $25,000 provision was necessary to reach
the desired level for the allowance. Our level of non-accruing loans, loans 90
days and still accruing and restructured loans was $616,000, or 0.62% of total
loans, at December 31, 2005 as compared to $451,000, or 0.52% of total loans, at
December 31, 2004. The slight reduction in the ratio of the loan loss allowance
to total loans from September 2005 to December 2005 is justified by the fact
that most of the growth in loans originated by the Bank were residential real
estate loans, rather than commercial and consumer loans, which have more risk.
Non-interest Income. Our non-interest income was $22,000 higher in the
fiscal 2006 quarter as compared to the fiscal 2005 quarter. As stated earlier, a
service charge increase of $16,000 and a gain of $7,000 on the sale of loans
combined for the increase in non-interest income.
Non-interest Expenses. Non-interest expenses decreased by $2,000 from the
2005 fiscal quarter to the 2006 fiscal quarter. Directors' fees, occupancy and
equipment expense, and other operating expense increased by $9,000, $13,000 and
$11,000 respectively, while decreases in salaries and employee benefits of
$14,000 and foreclosed assets expense of $20,000 helped to keep non-interest
expenses in check. A change in the health insurance coverage eliminated the
self-insurance portion liabilities and resulted in savings of $20,000 in the
first quarter. Director fees increased as the result of an increase in meeting
fees. Occupancy and equipment expenses increased as equipment and software
maintenance contract expense increased by $8,000 and building maintenance
contracts increased by $6,000. The increase in other operating expense was
mainly due to an additional $4,000 in advertising expense and $6,000 in
miscellaneous expense.
At December 31, 2005, we had thirty-three full-time and one part-time
employee, compared to thirty-two full time and one part-time employees at the
end of December 2004.
Income tax expense. Our income tax expense increased by $42,000, or
35.0%, comparing the first quarter of fiscal 2006 to the same quarter of fiscal
2005. The increased expense was the result of higher income before taxes of
$118,000 over the same period, an increase of 34.8%.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings from FHLB, and
proceeds from the principal and interest payments on loans and securities.
Scheduled maturities and principal payments on loans and securities are
predictable sources of funds. We can also control the funds available from
borrowings. However, general economic conditions and interest rate conditions
can cause increases or decreases in deposit outflows and loan pre-payments,
which can also affect the level of funds we have available for investment.
In general, we manage our liquidity by maintaining a sufficient level of
short-term investments so funds are readily available for investment in loans
when needed. During the three months ended December 31, 2005, we decreased our
cash and cash equivalents by $602,000.
Deposits increased by $401,000 during the quarter ended December 31, 2005.
In addition to factors within our control, such as our deposit pricing
strategies and our marketing efforts, deposit flows are affected by the level of
general market interest rates, the availability of alternate investment
opportunities, general economic conditions, and other factors outside our
control. We reduced borrowings from FHLB by $250,000 during the quarter ended
December 31, 2005.
We monitor our liquidity regularly. Excess liquidity is invested in
overnight federal funds sold and other short-term investments. If we need
additional funds, we can borrow those funds, although the cost of borrowing
19
money is normally higher than the average cost of deposits. As a member of the
FHLB, the Bank can arrange to borrow an additional $13.8 million against our one
to four family mortgage portfolio. We have used borrowed funds to help us
leverage capital and grow the Bank, but have not needed borrowings to cover
liquidity shortfalls. In addition to borrowings, we believe that, if we need to
do so, we can attract additional deposits by increasing the rates we offer.
We measure liquidity on a monthly basis and want to maintain a liquidity
ratio of between 5% and 15%. At December 31, 2005, the ratio is 5.5%. We will
continue to monitor liquidity.
Off Balance Sheet Arrangements
The Company's financial statements do not reflect off-balance sheet
arrangements that are made in the normal course of business. These off-balance
sheet arrangements consist of unfounded loans.
We had $2.9 million in outstanding commitments to make loans at December
31, 2005, along with $3.6 million of unused home equity, commercial and
overdraft lines of credit. We also have a commitment to sell the $2.2 million
guaranteed portion of a USDA guaranteed loan we originated. We are awaiting USDA
approval for the sale. We anticipate that we will have enough funds to meet our
current loan commitments and to fund draws on the lines of credit through the
normal turnover of our loan and securities portfolios. At December 31, 2005, we
had $21.0 million of time certificates scheduled to mature within one year. We
anticipate that we can retain substantially all of those deposits if we need to
do so to fund loans and other investments as part of our efforts to grow and
leverage our capital.
Capital Resources
The OTS has minimum capital ratio requirements applying to the Bank, but
there are no comparable minimum capital requirements that apply to us as a
savings and loan holding company. At December 31, 2005, the Bank exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $18.8 million, or 15.1% of average assets and with total risk-based capital
of $19.4 million, or 27.1% of risk-weighted assets. The Bank also had tangible
capital of $18.8 million, or 15.1% of average tangible assets. The Bank was
classified as "well capitalized" at December 31, 2005 under OTS regulations.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The term "disclosure
controls and procedures" is defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, or (the "Exchange Act"). This term refers to the controls and
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time periods. Our
Chief Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2005,
and they have concluded that as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Controls. There were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls during the quarter ended December 31, 2005, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are subject
to legal actions, which involve claims for monetary relief. Management, based on
the advise of counsel, does not believe that any currently known legal actions,
individually or in the aggregate, will have a material effect on its
consolidated financial condition or results of operation.
Item 6. Exhibits
31.1 Certification of Principal Executive Officer pursuant to
Rule 13a - 14(a) / 15d - 14(a)
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a - 14(a) / 15d - 14(a)
32.1 Certification of Principal Executive Officer pursuant to
Section 1350
32.2 Certification of Chief Financial Officer pursuant to
Section 1350
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Gouverneur Bancorp, Inc.
Date: February 9, 2006 By: /s/ RICHARD F. BENNETT
------------------------------------
Richard F. Bennett
President and Chief Executive Officer
(principal executive officer and officer
duly authorized to sign on behalf of the
registrant)
By: /s/ ROBERT J. TWYMAN
------------------------------------
Robert J. Twyman
Vice President and Chief Financial
Officer
(principal financial officer duly
authorized to sign on behalf of the
registrant)
21